Global Calls for Economic Justice: the potential of Islamic finance - PowerPoint PPT Presentation

2012 LSE-Harvard public lecture on Islamic Finance Global Calls for Economic Justice: the potential of Islamic finance Mukhtar Hussain Justice Cranston Chief executive officer, HSBC Malaysia Chair Professor Volker Nienhaus Visiting professor, University of Reading Suggested hashtag for Twitter users: #lseislamfin

2012 LSE-Harvard public lecture on Islamic finance – London, 22 February 2012 Global Calls for Economic Justice: The Potential of Islamic Finance Prof. Dr. Volker Nienhaus

0 Outline 1. Economic Justice: Concepts and Calls 2. The Potential of Islamic Finance 3. Realities of Islamic Finance 4. Drivers of Conventionalisation 5. Activation of Potentials

1 Economic Justice: Concepts and Calls [Discussion of] Principles (abstract) in [Calls for] Action (concrete) by • Religious teachings • Political philosophy • Religious movements (e.g. liberation 20 th century o o Christianity Natural law theology, Muslim brotherhood) o o Islam Libertarianism • Human/Civil rights movements o o … … • Green parties • Economic theory o Welfare economics • Political uprisings (Arab spring) 2011 o Public Choice Occupy movements (OWS) • o Game theory o … for against • Growing inequality • Employment and income • Participatory justice (total wealth US 20/87%) opportunities (opportunities, • (Youth) Unemployment • Minimum wages/living procedures) • Political system standard • Distributive justice (authoritarian, inactive) • Fairness, dignity (outcomes) • Unbridled capitalism • Financial system reform (excessive debt, socialising • Poverty alleviation losses, impoverishment of • Social security the middle class) • Health, housing, education

2 The Potential of Islamic Finance Islamic economic system Islamic banking • Solidarity Islamic capital market Prohibition of • Finance for real economy ( Takaful ) • Riba • Support for entrepreneurs • Zakat • Equity (stocks, VC) Shari’ah • Gharar • Mobilization of savings • Waqf • Sukuk • Maysir • No reward without risk • Participatory finance • Private property with social obligation (no collateral, SMEs) • Fair competition • No speculation • Basic infrastructure and social services Superior allocation, distribution, systemic stability • Growing inequality • Employment and income • Participatory justice (total wealth US 20/87%) opportunities (opportunities, • (Youth) Unemployment • Minimum wages/living procedures) • Political system standard • Distributive justice (authoritarian, inactive) • Fairness, dignity (outcomes) • Unbridled capitalism • Financial system reform (excessive debt, socialising • Poverty alleviation losses, impoverishment of • Social security the middle class) • Health, housing, education

2 The Potential of Islamic Finance Islamic banking Islamic capital market Prohibition of • Finance for real economy • Riba • Support for entrepreneurs • Equity (stocks, VC) Shari’ah • Gharar • Mobilization of savings • Sukuk • Maysir • No reward without risk • Participatory finance Claim or reality? (no collateral, SMEs) • No speculation Superior allocation, distribution, systemic stability • Growing inequality • Employment and income • Participatory justice (total wealth US 20/87%) opportunities (opportunities, • (Youth) Unemployment • Minimum wages/living procedures) • Political system standard • Distributive justice (authoritarian, inactive) • Fairness, dignity (outcomes) • Unbridled capitalism • Financial system reform (excessive debt, socialising • Poverty alleviation losses, impoverishment of • Social security the middle class) • Health, housing, education

3 Realities of Islamic Finance Islamic banking Islamic capital market Prohibition of • Finance for real economy • Riba • Support for entrepreneurs • Equity (stocks, VC) Shari’ah • Gharar • Mobilization of savings • Sukuk • Maysir • No reward without risk • Participatory finance (no collateral, SMEs) questionable • No speculation Yes, but not always, and • Predominantly short-term trade finance (little impact on employment, income generation, and poverty alleviation) • Longer-term finance mainly for real estate (= investments in bubble-prone and often speculative markets) • Increasingly project financing for public infrastructure (little impact on domestic SMEs) • Little corporate finance, very little SME finance, hardly any participatory finance • Sophisticated techniques to minimize the risk that results from the use of trade/rent contracts for financing purposes (e.g. customer as agent, purchase oders, • No financing without collateral • No evidence for additional net savings (deposits transferred from conventional banks)

3 Realities of Islamic Finance Islamic banking Islamic capital market Prohibition of • Finance for real economy • Riba • Support for entrepreneurs • Equity (stocks, VC) Shari’ah • Gharar • Mobilization of savings • Sukuk • Maysir • No reward without risk • Participatory finance (no collateral, SMEs) • No speculation Results of contractual engineering: • Finance (largely or completely) detached from the real economy (e.g. tawarruq, commodity murabaha, Islamic repos, asset based securities) • Development of Shari’ah compliant functional equivalents of conventional structured products (options, swaps, plugs) • Prototypes of securities (derivatives) suitable for trading within the financial sector • Inadequate corporate governance structures (no voice for ultimate risk bearers: investment account holders, takaful participants) • Systemic risks not fully recognized (e.g. threat of bank run due to ineffective deposit guarantee schemes) � Significant divergence between claims and realities of Islamic finance

4 Drivers of ‘Conventionalisation’ Islamic banking Islamic capital market Prohibition of • Finance for real economy • Riba • Support for entrepreneurs • Equity (stocks, VC) Shari’ah • Gharar • Mobilization of savings • Sukuk • Maysir • No reward without risk • Participatory finance Inroad of conventional (no collateral, SMEs) financial institutions into a • No speculation profitable market segment • Conventional mindset • Structuring expertise • Profitability of trading • Shareholder value Shari’ah scholars in board positions: orientation • Main role: legal advisors • Board positions attractive (reputation, compensation) • Appointment by BoD/shareholders Status quo as a • Micro-legalistic approach challenge; • Lack of macro-systemic understanding ways forward? • Pragmatism in the name of maslahah (public good)

5 Activation of Potentials Islamic economic system Islamic banking Islamic capital market Prohibition of • Finance for real economy • Riba • Support for entrepreneurs • Equity (stocks, VC) Shari’ah • Gharar • Mobilization of savings • Sukuk • Maysir • No reward without risk More distinctiveness from conventional • Participatory finance finance and authenticity (no collateral, SMEs) with a systemic perspective • No speculation Product development Regulation Market discipline Public awareness • Participatory • Reconsider • Best practice • Islamic economists finance with limited systemic stability examples • Financial literacy downside risk qualities of IF • Performance • Specialised media • Participation • Consumer analysis • Rating and ranking certificates protection • Islamic benchmarks • Academic study • accounts with • Shari’ah • Competition (intra- programs and transparent risk/ governance system and inter-sectorial) research return profile Growth potentials as ethical finance and socially responsible investment, contributing to economic justice (instead of complicated and restrained replication of conventional finance)

Contact Details Prof. Dr. Volker Nienhaus Dachsfeld 38a 45357 Essen – Germany Tel: +49 (0) 201 8695750 Fax: +49 (0) 201 8695752 Mobile Germany: +49 (0) 176 63755466 Mobile UK: +44 (0) 7787 049649 volker.nienhaus@gmx.net

2012 LSE-Harvard public lecture on Islamic Finance Global Calls for Economic Justice: the potential of Islamic finance Mukhtar Hussain Justice Cranston Chief executive officer, HSBC Malaysia Chair Professor Volker Nienhaus Visiting professor, University of Reading Suggested hashtag for Twitter users: #lseislamfin